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Wal-Mart's Big Gamble

Wal-Mart and more than 100 of its suppliers are engaged in a great experiment, an undertaking that could establish radio-frequency identification (RFID) as a major force in supply-chain management -- or relegate it to the list of technologies that have promised more than they could deliver.

However, while some manufactured-goods producers are several months or more ahead of Wal-Mart in implementing RFID technology and benefiting from the experience, others are having difficulty figuring out how their investments in tags, readers and the rest of the paraphernalia will pay off. For the makers of low-cost consumer products such as toilet paper and toothpaste, for example, the return-on-investment for implementing RFID technology doesn't exist right now, says Kara Romanow, research director at AMR Research in Boston. "And I think it's going to be a long time before it's there," she adds. For these producers and some others, the major incentive for complying with Wal-Mart's RFID mandate seems to be the fear of losing Wal-Mart as a major customer. "They've got to do it, whether they have a business case or not," states Romanow.

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Supplier ScenariosThe experiences of three Wal-Mart suppliers -- Jack Link's, HP and Pacific Bicycle -- illustrate how manufacturers, sometimes in very different ways -- are working with Wal-Mart's RFID mandate.

"There has always been a love-hate relationship between Wal-Mart and its suppliers. And in a lot of ways, the RFID mandate has exacerbated that relationship," says Andrew Macey, vice president, global supply chain, at Sapient Corp., a Cambridge, Mass.-based consulting and technology services firm. "It's a double-edge sword for suppliers to be supplying to Wal-Mart. . . . The revenues are hugely important to consumer packaged goods companies. Yet they are extracted at a heavy toll. Wal-Mart is relentless on price. Service levels are very difficult to manage to," he says. "The RFID dimension is just an added burden of cost, and Wal-Mart has been very clear that they do not want to pay for it. So, for most suppliers at the moment, there are lot more negatives than positives," contends Macey.

Wal-Mart suppliers have collectively spent $250 million to implement RFID, calculates AMR Research. Yet, "many are more convinced than ever that there is no benefit, and even worse, consider their technology investments to be throwaway so far," AMR Research's Romanow stated last December.

Cost Of Compliance

The number of tags needed. The sophistication of those tags. The types of products. The distribution environment. All affect the cost of implementing an RFID (radio-frequency identification) system. Boston-based AMR Research estimates the cost of putting together a full-fledged system that can leverage data for a consumer packed goods manufacturer that ships 50 million cases a year at $13 million to $23 million.Here's the accounting:

Tags and readers

$5 million to $10 million

System integration

$3 million to $5 million

Changes to existingsupply-chain applications

$3 million to $5 million

Data storage and analytics

$2 million to $3 million

Total

$13 million to $23 million

Source: AMR Research

"Meanwhile, Wal-Mart is running a revolution in supply-chain management, not lagging behind and waiting for evolution to slowly move things along. "There comes a time with every technology when someone has to step forward and say the time has come," asserts Christi Davis Gallagher, a Wal-Mart spokesperson. "The time to introduce RFID solutions into the retail industry has come, and we felt that starting with the top-100 suppliers was the best approach to implementing RFID technology into Wal-Mart's supply chain."

RFID, a technology that dates back to the 1940s, is way beyond the now-ubiquitous bar codes found on products from candy to computers. Bar codes basically count products for retailers such as Wal-Mart. RFID, with its more sophisticated tags and readers, can tell retailers and suppliers what's in a case, what's on a pallet and where products are at any point along the supply chain. Recognizing that about $1.2 trillion worth of inventory is stuck at some point within the supply chain at any given point in time, "there's massive room for improvement," asserts Nolan Rosen, chief marketing officer at Sterling Commerce, a Dublin, Ohio-based provider of e-business solutions and a subsidiary of SBC Communications Inc.

"Wal-Mart, as any retailer, is basically a distributor of product," explains Rebecca Morgan, founder and president of Fulcrum Consulting Works Inc., Cleveland. "They have to be able to get [products] in and get them out extremely effectively and track them while they are doing that. And RFID is their attempt to track them better."

The increased "visibility" of the supply chain that RFID promises also could help suppliers of goods to Wal-Mart see their ways to better production scheduling and inventory management -- although, claims Beth Enslow, vice president for enterprise research at the Boston-based Aberdeen Group, "Most companies today don't do a good job [of] even using point-of-sale data." Emphasizes Morgan, "The inefficiencies in the handling system are a very different issue from inefficiencies in supplier scheduling. RFID has phenomenal capabilities. It remains to be seen how we choose to make money off of those."

Although, RFID sometimes seems like a faith-based initiative -- "I don't know," says Morgan, "that Wal-Mart knows what the benefits are going to be" -- the revolution began for real less than two years ago. "About 18 months ago, Wal-Mart's top-100 suppliers were challenged to tag product cases and pallets destined for Wal-Mart's three Dallas/Fort Worth area distribution centers and associated stores by January 2005," explains spokesperson Gallagher.

Some 37 additional suppliers -- including Jack Link's Beef Jerky, a Wisconsin-based maker of snack foods, volunteered to meet the January 2005 milestone.

RFID implementation at Wal-Mart is slated to continue through next year. "Our next 200 top suppliers will need to be tagging cases and pallets by January 2006. [And] we'll have all domestic suppliers involved in the initiative by the end of 2006," Gallagher says.

However, "at this stage of the technology it is fair to say that it is unrealistic to categorically say all products that are shipped into the Wal-Mart distribution centers can be read 100% of the time," states Larry Cinpinski, vice president of the emerging business group at Catalyst International in Milwaukee. Part of the reason is physics. Metals reflect the radio-frequency waves that are part of RFID, and liquids absorb them. A result is that tags are more difficult to read. RFID tags on packages in the middle of a pallet also are difficult to read -- although Hewlett-Packard Co. says spinning a pallet on a turntable has improved readability.

If he were a supplier to Wal-Mart right now, Cinpinski says he would do the minimum needed to comply with the RFID mandate. For example, he'd be selective with what part of his total production he tagged, in part because the average cost of a tag remains several times the 5 cents originally touted. Numbers from AMR Research suggest suppliers are following a minimalist approach. AMR Research figures that each of Wal-Mart's top 100 suppliers has spent between $1 million and $3 million to comply with the RFID mandate, far less than the $13 million to $23 million it would take for a consumer packaged goods manufacturer to fully implement RFID.

Yet, Cinpinski's strategy comes with its own cost. Suppliers won't get all the good stuff -- the data that can lead to improved operational flows, greater labor efficiencies and better inventory management -- until it's feasible and cost-effective for them to place RFID tags on all items headed everywhere. But "when that happens, I believe the suppliers will see substantial benefit."